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This article appears to be written under the assumption that coinbase and other exchanges are counterparties to the price. They are not. They are market makers.
by 1053r 9y ago
This article appears to be written under the assumption that coinbase and other exchanges are counterparties to the price. They are not. They are market makers. It's impossible to have a run on dollar demand for BTC, because the price floats. If there are sufficient people selling, the price will simply fall, and has done so several times in the past, before recovering when equilibrium returned to the market. Exchanges are not taking loans to back the dollar value of BTC.
The author appears to lack basic understanding about how markets work in this space.
- adrianmacneil 9y agoAgreed. I got about half way through the article before realizing the author does not understand how an exchange works.
- ifdefdebug 9y agoStill Exchanges need to have two things: 1) enough coin to satisfy coin withdrawals, even in the middle of a panic run 2) enough fiat to satisfy fiat withdrawals, even in the middle of a panic run I think maybe that's what the author meant, not sure. But if the exchanges fail to show their customers' assets, they will reinforce any panic feedback loop that might be happening sometime in the future.
- vasilipupkin 9y agoyes. from the article: "The most obvious way, in my view, that Bitcoin mania will turn into Bitcoin panic is when a Bitcoin depositor goes to sell their BTC for dollars – and there are no dollars available to satisfy that sell request." coinbase has to have the dollars to let me withdraw those dollars from coinbase to my bank account. They may not have enough on hand.
- ifdefdebug 9y agobut that's a different problem. If you want to sell BTC for dollars, you depend on the order book to have enough bids in it to satisfy your request, or you have to make a sell order and hope for someone to take it. Exchanges don't have to show liquidity for that, they have to show liquidity when people want to withdraw their assets (edit: complete truncated sentence).
- vasilipupkin 9y agoyes, that's the problem. the order book is already quite thin - and in a panic, it can disappear and reappear at a much lower price.
- ifdefdebug 9y agoVery true. That's why a stop loss to market is a total suicide in this market. Better do a stop loss to limit and if the limit fails, keep your coins and wait for better times...
- mrb 9y agoBitcoin's trading volume (and implicitly order book) is already bigger (impl. deeper) than stocks with comparable market capitalization, eg: BTC: $160B market cap, ~$5B traded/day INTC: $200B market cap, ~$1B traded/day So if there was panic selling of INTC, the stock would presumably dive deeper and lower than a panic sale of BTC...
- vasilipupkin 9y agosure, panic selling is possible in INTC, absolutely. Valuing INTC is easier, though, because it actually pays dividends and because it can be compared to other stocks.
- paulpauper 9y agoit is a lot lower than than that. you have to divide by the number of major bitcoin exchanges
- stale2002 9y agoSure, that it true. But this is only a problem if coinbase or whoever is acting as a fractional reserve system. As far as I know, every single dollar and Bitcoin that coinbase "says" you have is actually in an account somewhere, dollar for dollar and Bitcoin for Bitcoin. If this is NOT true, and coinbase is a fractional reserve system, that would be a huge scandal.
- pjbyrne 9y agoBitcoin itself is a fractional reserve system.
- coryl 9y agoFractional reserve systems have fixed maximum supply of currency? According to the Bitcoin protocol, only a maximum of 21m BTC can exist. And that they are created via mining in a predictable schedule. Respectfully, I think you need to revisit Bitcoin fundamentals.
- pjbyrne 9y agoNobody thinks of BTC in BTC terms. They think of it in USD terms, and right now the notional amount of BTC is higher than the amount of USD that will be available to meet it in the event of a very sharp correction. At least, that's my view. We'll see if there's a flight to liquidity when the bubble in Bitcoin's price finally pops.
- stale2002 9y agoOK, so in your world Bitcoin is an overpriced bubble. That's a reasonable position to have. I think it is overpriced too. It still doesn't make it a 'fractional reserve system'. It instead means that the price is to high. These are different things, that have nothing to do with each other.
- vasilipupkin 9y agohere is a more specific scenario. By a confluence of events, a large number of bitcoin holders decides to liquidate at the same time. Price falls, triggering stops, at which point other people with significant bitcoin holdings panic and try to sell their holdings, triggering further stops, etc. Price rapidly falls by 75% or more within 1 or 2 days.
- nrhk 9y agoThen we have cheap bitcoin and people hop right back on. It's not going to go to 0 ever, unless its replaced by another de facto crypto as the face of the entire industry. It's a deflationary, uncontrolled currency in a world that prints wealth, its easy to see why people want to hold some money here.
- vasilipupkin 9y agoSure, I am not saying it will be worth zero ever. I am saying it can become worth a lot less than today in a matter of days. Part of the problem that I have is I have no idea how to value bitcoin. I can sort of understand how to roughly value a company. But bitcoin I have no idea.
- jaggederest 9y agoThere's something of a practical floor on price at the cost of the electricity to mine a coin times the lowest rate of electricity available at the moment. (Somewhere in the realm of $500 AFAIK) Now, since the difficulty changes over time I could imagine that not being as high as people think (e.g. if mining companies abandon bitcoin for other currencies), but there is a real world equivalent to book value.
- vasilipupkin 9y agothat argument makes no sense to me personally. For example, if I rented a warehouse, filled up that warehouse with iphones and hired workers to systematically destroy those iphones with hammers, there would be a cost to that activity. but it wouldn't a price floor on anything. The thing itself has to have value, the cost of the thing is not a price floor
- decentralised 9y agoI'm glad I'm not the only one noticing this. He seems to write to an audience that is less knowledgeable than himself, but lacks factual content and is often cringeworthy.
- deleted 9y ago[deleted]
- banderman 9y agoWhat about all of the exchanges offering significant margin trading? Where does all that credit come from? How can they guarantee that'll all be covered in a significant price drop if the buy side of the book is cleared?
- dahdum 9y agoPolo/Bitfinex are peer to peer lending, so the exchange isn't taking the risk. I'm not sure about Coinbase but I vaguely remember it was outside institutional money funding the margin. Derivative markets like Bitmex use a form of socialized loss to remove the risk.
- pjbyrne 9y agoHi, author here. A liquidity crunch is not the same thing as a fall in Bitcoin's price. A liquidity crunch implies that the people who provide the dollars to this market (banks, I'm informed) cease doing so because they don't have confidence that the money they lend to provide USD liquidity to fiat on/offramps will be able to be repaid by their counterparties during whatever the maturity period is of the facility. As a result, companies like those on/offramps run out of dollars, and Bitcoin cannot be shifted through those platforms for any price. This happened to the London interbank lending market during the week of 15 September 2008, when LIBOR jumped to 8% and the banks simply stopped providing loans to each other. The reason? Because they weren't sure the assets their counterparties (other banks) were sitting on were worth anything (resi mortgages) and they didn't want to find themselves an unsecured creditor. Mortgages during the subprime crisis didn't fall in price so much as they were impossible to price. This made the credit risk of bank borrowers impossible to price. So funding headed for the doors. Change up the parties a bit and the banks --> offramps, mortgages ---> Bitcoin, and liquidity --> fiat, as in 2008. There is simply no way that, as Bitcoin goes parabolic, the on/offramps are prepared to handle a change in the weather which results in a huge influx of withdrawals unless their own bank balances rise significantly. My informed supposition is that most such entities should have high-cost liquidity facilities with commercial banks that can step in and address some of that withdrawal demand. As then, a liquidity shock (availability of dollars) could break the system without needing a precipitous drop in the market price of Bitcoin.
- mrb 9y agoI've already pointed out you don't seem to understand how Bitcoin exchanges operate: https://twitter.com/zorinaq/status/935016692270489600 https://twitter.com/zorinaq/status/935016692270489600 Banks don't provide liquidity to Bitcoin exchanges. Exchanges don't borrow from banks. Exchanges don't trade with their money, or their users' money. Exchange users deposit money to exchanges, and exchanges dumbly execute orders specified by their users. That's it. For example BTC/USD bids on an exchange's order book are 100% backed up by dollars that have already been deposited by users on this exchange's bank account.
- pjbyrne 9y ago